To build or not...financial ???

comfortdogOctober 23, 2007

We have been tossing around building a larger home on a larger piece of land. Our current home is 5 years old which we built. We do still carry a mortgage. The market for building is great right now due to the supressed industry. However, the selling market is not so great. We do not want to take a hit on our current home unnecessarily-although not sure we would ( another one of those unknowns). We have 6 kids so any kind of moving will be an upheaval. Building this home would be pushing the limit of our house affordability-plus requiring a larger mortgage-but on the other hand we would be doing it now when we need the room and getting more house due to the economy. Is it stupid to go further into debt in this economy? Is there such a thing as affordable debt? We don't carry debt on anything else other than our home. Any financial counselors out there that would care to weigh in?

I doubt that anyone here would try to tell you what to do. But perhaps we can offer questions to consider.

The only debt you have is your mortgage, right? Do you have enough equity to pay for a substantial amount of a new home, or would you be stretching your budget? I ask because building a home entails unforseable, unavoidable expenses. You've done it once, so you know what I'm talking about. It's very tough to do on a shoestring and/or a tight budget. Unless you have a substantial amount of equity, I'd consider remodeling or purchasing an existing home that would meet your needs.

If you decide to go for it, you will then have to decide whether to sell and find temporary housing while you build. Or wait and hope that you can sell at an opportune time. In today's market, the first option would be less risky (albeit more work and hassle, esp with a large family).

My DH is pretty much leaving the fact finding up to me. He will support it if it is prudent and workable. Since it has only be a little over 5 years since we last did this he certainly doesn't love the idea of all the headaches, but who does? We do have equity in our home. Hopefully, about 30% of the loan amount. It would still be a decent jump. Basically twice as much as our current, but we do already pay a substantial amount on an equity loan- but that includes the extra I pay on the principal for both the mortgage and equity.
Believe me, if I could find an existing house I would jump on it in this market. However, with a large family there just aren't homes out there with the footprint that we need. We also are looking outside the planned neighborhoods. I can find nice homes with decent prices, but they are all in neighborhoods and that would be silly to make a lateral house move and not get all the features that we need. My main question for asking this on the financial forum is because of the economy and any upcoming forecasts that people may be more in tune with than I am that would frown upon digging deeper into our pockets and putting more debt on our plates. I realize there isn't a right or wrong answer. Just wondering if there is a general wind blowing in any certain direction.

Another thing to consider - not only would you have the cost of building an extra-large home, but how could you recoup your costs? It's pretty well-established that in most RE selling situations, a home considerably larger than its neighbors doesn't get an appreciably greater price, although of course YMMV.

Are you and DH fully funding your retirement portfolios? If you are not doing this, and building a larger house will strain your budget even further, I'd suggest you stay where you are and perhaps do a modest addition.

The children grow up and move away, whereas your retirement is getting closer all the time, LOL! Good luck with whatever you choose to do.

I think some of this depends on the area that you live in. You wouldn't be thinking of this if you didn't think you could sell your home for what you need. So....a fairly good appreciation market? You don't see that changing?
What about if inflation starts to go up, that's been talked about. It will impact your budget quite a bit.
I think you need more information and then run some numbers with some cushion built in for a recession/rising inflation and or small emergency.

As an alternative to moving at all, is it possible to add on to your current home so that it would suit your needs?

If it is simply the house that no longer works for you... not the neighborhood, neighbors, amount of yard, distance from whatever, or other things that can not be changed, then it may be easiest and cheapest all around.

After all, you know what's wrong with this house, what works and what doesn't, you'd have to go through all that again with any other house, regardless if you bought or built it. Whereas with an addition you could possibly fix what doesn't work for you in your current home.

I'd be very nervous about doubling my house payment. With the rising prices of food and fuel.....

Have you actually attempted to live with what you would be paying for the new house payment? Like putting the amount that is more than your current payment (including HELLOC) in a savings account each month for several months, and seeing how it would impact your quality of life. If you are thinking of increasing your sq footage considerably, also tack on a bit for larger fuel bills, and if you are considering moving further from the places you go, add in a bit for fuel for the vehicles as well. After that you would have a better idea about whether or not it would be advisable for you to move.

If you decide not to, well then you have a bit saved up for the addition (or paying down your current mortgage or HELLOC), and if you decide to move you have a small cushion to pay both mortgages if it becomes necessary.

One more thing..... I would have a realty company come out and price the house for the current market. It may not be worth as much as you think it is, and that may impact your decision.

CHISUE:"I'm not sure what you are saying when you talk about planned neighborhoods -- do you mean land being developed by a builder or builders?"
I guess I didn't phrase that well. We live in a community with lots and lots of builder developed neighborhoods. That is what I was referring to. Our current one is a nice size and is only accessible by one entrance which cuts down on any thru traffic, however, it is still a neighborhood with people having visual access to our backyard at all times. We live on a corner lot which makes us more exposed. Fences are not allowed. With 5 boys we have always thought that living on a larger piece of land but still being accessibly close to amenities would be a nice trade off. This 10 acre parcel allows that while not having my kids leave their current schools. That's the tricky one.
MOMTO6: We don't really have anyway to change our home without it costing a lot of money that would not be recoupable. Plus, I'm not sure we have the room on our lot to do so. The idea of trying to live on ad adjusted monthly payment is a wise one. The extra I pay to the HELOC a month plus the extra I pay on the regular mortgage a month (and other monthly payments I have recently payed off) would show that I am about 300-500 short of an actual monthly payment that I have already been paying out a month.
This housing option is kind of an "wouldn't it be nice....." house. I'm sure a financial planner would look at our lives with 6 kids and college on the horizon and say we are nuts!!! (At least, I think they would...)However, life is short and if we do this, now would be the time as our kids are all still home. Sure, we could be perfectly fine staying in the home we are in. I still love this house and the features that I designed for the functionality of the way we live. There would be trade offs both ways. Our community's real estate has definitely adjusted- I wouldn't say it has tanked. Certainly leveled off. It was going gang busters for awhile-crazy! I think it will stabalize and recover before the national average. There are many high end homes and neighborhoods. A new hosptital opening this winter and a huge expansion to a local industry being built tells me that people moving into the community will need homes. I'm getting such competitive prices from builders right now-not sure that will be repeated again in a long while. So hard to pass up the ability to get more house for less money. But on the other hand- hard to sell my house for less money than I had hoped it was worth......

pamghatten: Property values have declined somewhat but are not on a free fall. I did have a market analysis done in the spring of 07, but not sure if it is reliably relevant at this time. Actually, the cost of building materials for the bids I am getting are quite reasonable (other than copper) and one lumber yard said his bid would be about 5-10% less in the winter months as compared to now. For a very nice custom home I am getting bids just under 100.00 a square foot which is for this area very reasonable.
I would agree that pushing the affordability limit is not always the wisest. We thought we were doing that when we built this home 5 years ago, but that hasn't turned out to be the case. We are one of those families where are income looks really great on paper....but the realities with 6 kids is we do tend to spend a lot of money. I'm sure we could find ways to cut cost significantly if we wanted to. I believe the operative word there is "want to." It's nice to have extra money to send kids to camps and other luxuries like that. We would have to cut back on the discretionary spending for sure. Thanks for your input. At this point I am probably going to end up going with that gut feeling......I've turned away from opportunities like this in the past and denied those desires, so I know I am not being impulsive. I do hate that I am probably out 15K in architect fees, but that won't be a killer...just a drag!

comfortdog: Not sure there are many folks (financial planners or not) out there who get past the 6 kids without thinking you're nuts! *LOL* Not even sure they get to hear the rest of the question. =0) At least, I find myself having to repeat my question after the shock wears off. =0)

Ah well, it was an idea. Would it be possible to purchase the land without building on it right now? If you can get it at a good price and are really drawn to the location. You could spend the next few years paying down the house you are in now, which may help you be able to build your house later at a more affordable mortgage payment. Your month to month mortgage may be less, even if you pay a little more to have it built.

Hold on to the plans for the house. Even if this is not the right opportunity for your family, there will be others. =0) And if you do end up building it in a few years, you won't have to hire another architect to draw them up again.

How about a farm? With six kids you could start a family cooperative. LOL I was going to say 'cheap labor' but we all know kids aren't that! (What happens to that two-year-old who loves to 'help' by the time he gets big enough to really help?)

CHISUE: "How about a farm?" Yeah....I'd be willing to "farm" them out! Does that count???
I'm finding that kids get way more expensive as they get older. Fisher Price just doesn't have a good corner on the market for 14 year olds! Seriously, thanks for the extra thinking thoughts. I have run just about every scenario through my head. I would wait for a couple of years...but then my guys all start leaving home for college and would we still have as great a need? Granted, I will have plenty of kids home for a good number of years, but a little over 3 years with all six......sigh.......That is hard to believe.

The house actually will have about the same taxes as we pay now due to the fact we change counties. Odd, I know. We live in a county and pay as much as houses that cost twice as much as ours in a different county same school district. We are possible going with ICF walls and basement. This would mean our heating and cooling costs would be kept at a reasonable amount. Even if we wouldn't, windows and HVACS are so much more cost effective than they were even 5-6 years ago. Personally, I am more worried about selling our current house and having to move 2 times. That really was not fun last time.

I don't know how old you are, but you seriously need to have a home paid for when you retire. None of our kids will have that, they keep upgrading or selling to get out of a financial fix they get themselves in due to lost jobs or bad decisions. There is a good possibility they will end their lives living in a low income area or working until they die

jonesy: I understand the paid off sentiment, but I don't see myself living in this house (or dying in this house, rather). It would be a need for the immediate future to 10 years out. My husband and I would definitely sell and take the equity and buy something that we could either pay off or have a very affordable mortgage. We always think investment when we purchase or build a home. If we don't think it has appreciative value we would never do it.
comfortdog

It is a necessity for most people. We are fortunate to have a pension and savings. Savings can go in a hurry.....In the last year I paid out about $90,000. in care home bills. A paid for home is your best security for retirement. If your home is paid for no one can take it away from you except IRS. If it's mortgaged they can take it real fast. If it's paid for you can also down grade if you run out of savings.

I think joneysy's idea is good for a lot of people. Not everyone are financial mavens.

comfortdog - its' probably disappointing to give our idea but it probably works for your kids in the end in many ways as well as finanacially. Some friends moved to a small acreage and when they got transferred back to a city the kids were unexpectedly quite happy - now we'll have kids to play with! Not that they can't play with each other and have people over, but a good neighborhood with other kids right down the street is what a lot of memories are made of.

momto6 wrote: "Would it be possible to purchase the land without building on it right now? If you can get it at a good price and are really drawn to the location. You could spend the next few years paying down the house you are in now, which may help you be able to build your house later at a more affordable mortgage payment."

I like this idea. Have you seen that family with 16 kids on tv? The 'Duggars' built a huge house while still living in their rental. Everyone in the family helped build it.

Do you have a vacation home? Perhaps you could buy that large property now, put up a temporary 'vacation' dwelling (cabin/trailer/etc) while you take your time building. The kids would appreciate having a place to roam while learning life skills.

If you build a house with a mother-in-law suite, this would expand your options for privacy, whether it be for guests, grandkids or retirement.

I have always been a stay at home wife except for times when I was bored. I am where I am because of making the right decisions, staying out of debt as much as possible, saving as much as possible and paying off the mortgage with any extra money that came my way. My husband was just a laborer like most people we know. Neither of us had to have the best of anything. I wanted security and paying off the mortgage game me that.

Not sure what your market is like, but in most markets, buying a re-sale is less expensive and a LOT less hassle than building new. Have you considered a resale? As someone who has built a semi-custom home, I know that not having all the details of your house "your way" is tough, but a resale might meet your square footage needs more cheaply and with less agony associated with a build job.